Rep. Jason ChaffetzJason ChaffetzHillicon Valley: House Dems to investigate Ivanka Trump's email use | Trump calls controversy 'fake news' | Malware attributed to Russian hackers | Holiday cyber shopping tips | Group calls for Facebook whistleblowers House Dems to investigate Ivanka Trump's email use Utah New Members 2019 MORE (R-Utah) has introduced legislation that modifies the misguided and fatally flawed Marketplace Fairness Act (MFA) in a weak attempt to address the significant concerns raised by small and medium sized businesses. Yet, instead of coming up with a more workable system, the Chaffetz bill only makes MFA worse.  It creates enormous costs for small businesses; is a nightmare to administer; creates a huge risk of intrusive government audits; and increases the likelihood of endless litigation in state courts.  In essence, it is a massive giveaway to the big box stores, at the expense of small businesses around our nation.

Here are eight reasons why members of Congress should oppose this misguided and ill-advised legislation.

1.     The legislation gives 46 state tax administrators unbridled authority to audit any business, anywhere, any time.   The Marketplace Fairness Act gives each state the power to audit or demand payment from any business in any state.  The Chaffetz bill gives only illusory protection from state audit risks: Any business with over $5 million in annual sales gets no audit protection whatsoever. For smaller businesses, Certified Solution (software) Providers (CSP) will answer audit questions, but the business is still 100 percent liable if they make a single mistake in categorizing their products among the various taxability schemes of 46 different states.   This creates a huge risk of intrusive government audit.

2.     The legislation requires businesses to track rates and rules in over 10,000 taxing jurisdictions.   Just like MFA, the Chaffetz bill lets all 10,000 local tax jurisdictions impose unique rates, tax holidays, thresholds, and caps.  Each of the 46 states can still have their own definition for taxable products and services and a unique definition for key terms like “sales price”.  And each state can require its own filing form and payment mechanism.  This is simplification?  It creates an overlapping web of rules and requirements that only a tax lawyer could love.

3.     The bill forces businesses to assume huge implementation costs. CSPs will install their software, but aren’t required to pay for modifications and testing of a seller’s customized ordering and fulfillment systems. It is estimated that software to manage the complex web of laws would cost between $80,000 to $290,000 in initial setup and integration fees, with another $57,000 to $260,000 in annual upkeep. That’s a huge burden for mom-and-pop stores and other small and medium sized businesses.

4.     Taxpayers are forced into state court to challenge a state tax collector.  Even when challenging a state’s compliance with the Chaffetz bill, taxpaying businesses are forced to bring the case in state courts in the state they are challenging.  But challenges over a federal law should surely allow taxpayers to be heard in federal courts. Yet, the Chaffetz bill eliminated federal preemption and federal court jurisdiction in a cynical attempt to win support from the states.  This will create huge incentives for forum shopping and encourage endless litigation.

5.     The bill funnels billions of taxpayer dollars to software firms.  The Chaffetz bill was designed by Certified Software Providers (CSPs) to let them take 5-8 percent of taxpayer dollars right off the top.   The CSP, FedTax says it expects to make up to $1.3 billion/year if MFA passes. (NetChoice.org/FedTax).

6.     The legislation creates many of the same problems associated with Europe’s VAT. The EU learned a valuable lesson from a decade of forcing remote sellers to file Value Added Tax (VAT) wherever the customer resides, finding significant VAT burdens when selling across borders among 28 member states.   They found that European consumers would save over $13 billion each year “if they could choose from a full range of EU goods and services when shopping online.”  The EU’s new Digital Single Market proposal turns away from the MFA approach and essentially endorses Rep. Bob GoodlatteRobert (Bob) William GoodlatteGOP, Comey have tense day — with promise of a second date The Hill's 12:30 Report — Presented by The Embassy of the United Arab Emirates — Trump taps William Barr as new AG | Nauert picked to replace Haley at UN | Washington waits for bombshell Mueller filing Meadows says Comey's interview with House Republicans will be 'far reaching' MORE’s (R-Va.) proposed approach: "Instead of having to declare and pay VAT to each individual Member State where their customers are based, businesses would be able to make a single declaration and payment in their own Member State."

7.     The bill allows states to expand nexus and impose tax obligations on remote sellers.  Neither MFA nor Chaffetz’s bill prevent states from expanding their patchwork of laws imposing tax obligations on businesses with no physical presence in their state.  States can still say that commission payments create nexus, or that every business has to file intrusive and burdensome reports on remote purchasers.

8.     The bill provides no protection for America’s small businesses.  The Chaffetz bill gives a few years of phase-in for the smallest businesses, but takes it away from anyone using an ‘electronic marketplace’ for any of their sales.   This means any business has to immediately pay for modifications to their ordering and fulfillment systems — just because they get some of their customers from Amazon marketplace.  Worse, even hobbyists and collectors are liable for sales tax on every sale if they used eBay to find a single customer for rare Beanie Baby.

The bottom line is this:  the Chaffetz bill imposes huge cost, complexity, and chaos on the companies that can least afford it.  It tilts the marketplace in favor of big box stores and giant e-retailers. 

The alternative approach put forward by Goodlatte is a much sounder approach.  It seeks fairness and true parity by using the home jurisdiction and state tax laws of the seller as opposed to the purchaser, which is a far-more streamlined way of imposing Internet sales tax. The approach imposes a base tax rate in the case where the remote seller is in a sales-tax free state.  This is true Marketplace Fairness, since both remote and local sellers collect tax using a single set of tax rules.

By contrast, the Chaffetz bill is legislation that should be opposed by anyone seeking a level playing field for the small businesses that are the economic engine of this country.

Kavanagh is CEO of CohereOne. ; Bessin is chief operating officer of Circa Lighting.